Brick maker Hanson led London's top stocks higher as takeover gossip refused to subside, while the natural resources sector took a lift from a boost of confidence on Wall Street and steady commodity markets.
The FTSE 100 index rose 75.3 to 5873.6 by late afternoon, bouncing off a two-month low to register its first gain in three. The FTSE 250 jumped 89.1 to 9844.9 thanks to a broker tip on Emap and forecast beating results from Informa.
Across the pond, the Dow Jones Industrial Average pushed higher by 44.1 to 11619.19, hitting a new five-year high after a key consumer confidence indicator for September rose more than expected. That follows a UBS investor optimism index yesterday printing at its highest level since March.
The economic report overshadowed news that Lennar, a house builder, cut fourth quarter earnings guidance. It also underlined comments overnight from Richard Fisher, president of the Dallas Fed, who said the economy is doing "extremely well" outside the housing and autos sectors.
Meanwhile, oil prices rallied back from a six-month low below $60 as Opec confirmed it had discussed lower prices since the last meeting, increasing speculation the cartel may cut output before the end of the year. A barrel of New York benchmark cost $61.55 today, up nearly $2 from its weakest level yesterday, with residents talking of a big buy order that had squeezed out short positions.
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Hanson led the FTSE 100 risers amid renewed speculation that the aggregates group could be a takeover target. Mexico's Cemex, the world's third-largest cement maker, was mentioned as a potential buyer, with a few dealers claiming Hanson may have rejected an 840p approach.
Shares rose as much as 59.5p to 747p at the open, then pared that gain to 42.5p by the close as the spike did not force a company statement -- suggesting management has nothing to disclose. Stories about Hanson bid interest have been rife over the past month, with a Dubai consortium also mooted as a buyer as part of a joint venture with Cemex. So far, the rumours have failed to shake out much in the way of evidence.
Hanson is seen as valuable for foreign buyers as it would offer a large US business, where the group gets half its profit, and would provide an entry point into China. But there is a question mark over whether anyone would want to expand when the US economy is looking fragile, and as Hanson still faces unknown legal liabilities over asbestos.
Analysts also noted that any union with Cemex would require large disposals in the UK due to overlaps. Plus, Hanson has hardly been a profit machine over recent years, showing earnings growth of just 2 per cent in the first half. European peers Lafarge and Holcim have shown growth of 39 per cent and 18 per cent respectively.
According to Deutsche Bank, concrete makers usually go for about 16 times earnings, which would value Hanson at 840p per share. But the broker also saw "black box" asbestos liabilities as denting that valuation by about 35p per share. Alternatively, if Hanson is valued on its aggregate reserves it would imply at price of 804p. The broker kept "hold" advice and a 689p target, citing the various obstacles that stand in the way of any takeover.
(Yesterday's plausible but flawed takeover theory, Durex maker SSL International, ran back 1.25p to 335.5p -- a reminder that smoke does not always mean fire.)
Among the natural resources companies, Rio Tinto gained 82p to £24.34 and BHP Billiton took on 38p to 891p. Prices of copper and other commodities steadied along with the oil price, as traders weighed up the usual economic concerns with the prospect of end-of-quarter portfolio stuffing.
Goldman Sachs and Cazenove were both pushing the mining stocks to clients this morning. "We expect Chinese demand to continue to be underpinned by infrastructure investment, and supply to remain constrained," said Goldman. "The mining companies’ strong cash generation raises the prospect of higher dividends or further buybacks and M&A, which we believe should support a recovery in the shares."
Cazenove favoured the super-majors, saying that recent weakness has put the sector at earnings multiples "that suggest an imminent global, synchronised collapse in metal prices". While the derating was understandable given macroeconomic concerns, it made no sense that diversified companies have fallen in tandem with with the base metals prospectors, the broker told clients.
According to Caz's calculations, diversified miners such as BHP, Anglo American and Rio were at a 50 per cent premium to base producers such as Antofagasta and Vedanta at the start of the year. That has narrowed to 22 per cent on 2006 earnings. Yet prices for base products such as coal and iron ore barely exceed the cost of production.
While diversified miners are exposed to the base markets, they can generate cashflow during a downturn by having a range of differentiated assets whose varying profit margins tend to balance each other out. They also have a bigger capacity to return capital to shareholders and are -- at least in the case of Anglo and Rio Tinto -- more likely to be takeover targets than the likes of Vedanta because the latter have majority shareholders, Caz argued.
The broker kept "outperform" advice on Anglo and Rio, It also commented that Xstrata is now the cheapest in the sector despite its move to become a diversified through the purchase of Canada's Falconbridge. (Caz's sell side it is not allowed to offer advice on Xstrata while its corporate department is working on the takeover).
Track today's trading by industry sector here.
On the subject of commodities, Dairy Crest slid 28.5p to 578p even after saying it will sell the bulk of its own-label cheese operations to First Milk, a joint venture partner, for £62 million. Unbranded cheese was a low margin cyclical business for the maker of Utterly Butterly, generating only £3.4 million in profit last year.
UBS said it was an "excellent price", adding that it will improve Dairy Crest's earnings by increasing the proportion of branded profits in the mix. But a first half trading statement from the dairy was merely in line with expectations, which proved disappointing to the "buy on rumour sell on fact" crowd.
Analysts at both Panmure Gordon and ABN Amro moved Dairy Crest to "hold" from "buy" on valuation grounds today. Shares have jumped from around 436p since May on hopes of today's sale.
Back among the blue chips, BT Group eked out a gain of 0.5p to 258.5p after competition concerns led ABN Amro to cut its recommendation to "sell" from "hold".
The Dutch broker argued that operators providing last mile connections are now providing differentiated broadband services to BT's offer, and expects a customer exodus from its to show up in the numbers soon. BT currently has a 93 per cent market share in wholesale digital subscriber lines, which ABN said is looking highly vulnerable.
First half results from Informa, the specialist information publisher and organiser of conferences such as 3GSM, came in well ahead of expectations, lifting shares by 27.25p to 489.5p. First half profit was £39.1 million before tax, against a £58.9 million loss last year, with organic profit up 20 per cent over the period.
The rest of the media stocks beat the market for a second day, with ITV up 3.5p to 100.25p and WPP ahead 21p at 652p as its joint venture with Universal Music was considered a small positive. Media buyer Aegis, ever the bridesmaid, was up 1.75p to 133.5p.
Mid-cap Emap rose 19p to 741p after Goldman Sachs moved the magazine publisher onto its "buy" list, based on hopes management will cut costs.
Shares of Emap have dropped 17 per cent in the last three months, underperforming the media sector by 20 per cent, after an AGM statement in July sparked worries that sales of men's magazines such as FHM, Zoo and MaxPower are in terminal decline. Goldman reckoned the company could act to stem the loss as early as a trading statement due September 29.
"Emap's aim will be to produce enough cost savings to offset the margin pressures the company is facing in its UK consumer magazine business without significantly harming the creative potential of the business," said the broker. It estimated that the firm can afford to cut about 2 per cent from its cost base, which translates to £18 million off the annual staff and administration budget by 2012. This, along with some financial engineering, could mean increased cash returns for shareholders.
On a longer view, Goldman argued the Emap may consider selling its corporate publishing arm and focus on consolidating the UK consumer media sector. While this would be a departure from management’s existing strategy, it would improve growth prospects, Goldman argued. It also noted recent rumours that Emap could be bought, even though its spreadsheet suggests limited returns from a leveraged buyout.
Close Brothers added 62p at 999p, recovering from a 66p decline yesterday after its full year results revealed lower securities trading volumes than expected, and showed no evidence that banking had picked up. They also came with a surprisingly downbeat outlook statement: management at the investment bank said that while long term prospects remained strong, an uncertain political and economic outlook tilted risk toward the downside.
Citigroup cut its target on the shares by 50p to £13. "The current market valuation fails to reflect Close’s track record -- 14 per cent compound annual EPS growth over the past 10 years -- and its longer-term growth potential," said the Wall Street broker. It called yesterday's price weakness a buying opportunity.
Among the small caps, Forum Energy more than doubled after releasing independent tests saying it had a confirmed 3.4 trillion cubic feet of gas in its key Philippines prospect.
The company -- which was created in April last year out of assets from FEC Resources of Canada and Sterling Energy of the UK -- said untested sands around the area could double this figure.
Forum still needs to double its well count to six to gauge the prospect more accurately; it aimed to have one of the test wells drilled within a year. If the site proves commercial and Forum can secure a rig, production could start in five to seven years. The shares were ahead 72p to 140.5p.
On broker watch:
Lehman Brothers raised Morrison Supermarkets to "overweight" from "equal weight" and cut Tesco the opposite direction.
Goldman Sachs cut Reuters to "neutral" from "buy" and raised Emap to "buy" from "neutral".
Altium upgraded Inspace to "add" from "hold" and cut Liontrust Asset Management to "hold" from "buy".
Credit Suisse raised Weir Group to "outperform" from "neutral".
Deutsche Bank started coverage of GCap Media with a "sell" rating and 145p valuation.
UBS rated Carnival "buy" in new coverage, with a £28 target price.
And Bridgewell raised Corin to "overweight" from "neutral".
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